Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. Let's figure out what makes a great retirement-oriented stock, then examine whether Kraft Foods (NYSE: KFT) has what we're looking for.

The right stocks for retirees
With decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.

Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.

When scrutinizing a stock, retirees should look for:

  • Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.
  • Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.
  • Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.
  • Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.
  • Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.

With those factors in mind, let's take a closer look at Kraft Foods.


What We Want to See


Pass or Fail?

Size Market cap > $10 billion $54.7 billion Pass
Consistency Revenue growth > 0% in at least four of past five years 3 years Fail
  Free cash flow growth > 0% in at least four of past five years 3 years Fail
Stock stability Beta < 0.9 0.56 Pass
  Worst loss in past five years no greater than 20% (14.6%) Pass
Valuation Normalized P/E < 18 17.96 Pass
Dividends Current yield > 2% 3.7% Pass
  5-year dividend growth > 10% 5.9% Fail
  Streak of dividend increases >= 10 years 0 years Fail
  Payout ratio < 75% 52.9% Pass
  Total score   6 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

Kraft feeds investors a score of 6 on our 10-point scale. The food giant has stayed relatively stable and pays a very healthy dividend, which conservative investors like to see. But it has made some miscues that have resulted in inconsistent growth and a questionable future for the company.

Last year, Kraft made a bold play by buying British candy-maker Cadbury. Despite early enthusiasm about the merger, Kraft has made some mistakes in integrating Cadbury into the fold, ranging from pension issues for Cadbury workers to a culture clash across the two entities.

More importantly for long-term investors, that move has had financial consequences for Kraft, and investors need to keep an eye on the company. Free cash flow has fallen by nearly one-quarter in the past two years, which is a greater contraction than food producers General Mills (NYSE: GIS) has experienced but less than what Kellogg (NYSE: K) has endured. Other factors, including the loss of its exclusive deal with Starbucks (Nasdaq: SBUX) to distribute its coffee, could also hurt Kraft's bottom line.

The combination of the merger and a weak economy led Kraft to keep its dividend unchanged in 2009, breaking a seven-year streak of annual dividend increases. By itself, that isn't a huge problem, as the stock's dividend yield is still high. But it's just one example of how strategic moves can quickly have an impact on the things retirees and other conservative investors find most important in a stock. Kraft deserves a closer look, but it shouldn't automatically earn a place in your retirement portfolio.

Keep searching
Finding exactly the right stock to retire with is a tough task, but it's not impossible. Searching for the best candidates will help improve your investing skills, and teach you how to separate the right stocks from the risky ones.

Add Kraft Foods to My Watchlist , which will aggregate our Foolish analysis on it and all your other stocks.

If you want to retire rich, you need to be confident that you've got the basics of your investment strategy down pat. See if you're on track by following the 13 Steps to Investing Foolishly.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Kellogg is a Motley Fool Income Investor pick. The Fool owns shares of Starbucks, which is a Motley Fool Stock Advisor pick. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.